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• The 1980s highlighted the failure of many visible diversification, such as Exxon entering the office product market and Coca-Cola acquiring Columbia Pictures. As a result, the notion that “sticking to the knitting” (Peters and Waterman, 1982) might be the most desirable corporate strategy was widely promulgated. Indeed, by the late 1980s, many managers were struggling to justify the existence of their multibusiness corporations.
• Into this void came the development of generic strategies that classified corporate strategies according to the ways in which value was created. Following the success of his notion of generic strategies at the business unit level, Michael Porter (1987) identified four types of corporate strategy. These lay along a continuum of increasing corporate involvement in the operation of the business units.
Implications of Shareholder Value Maximization for Corporate Strategy
Implications of Shareholder Value Maximization for Corporate Strategy
For firms contemplating diversification Michael Porter (1987) proposes three ‘essential tests” to be applied in deciding whether diversification will truly create shareholder value:
1. The attractiveness test. The industries chosen for diversification must be structurally attractive or capable of being made attractive (Five Forces Model – Porter, 1980).
2. The cost-of-entry test. The cost of entry must not capitalize all the future profits (Entry Barriers – Bain, 1956, Porter, 1980).
3. The better-off test. Either the new unit must gain competitive advantage from its link with the corporation or vice versa (Parenting Advantage – Goold et al., 1994).
The parent has no automatic right to exist. To justify its existence, the parent should be able to demonstrate that its businesses perform better in aggregate than they would as a series of individual, stand-alone entities.
• In order to create value, the parent must do more than simply avoid creating misfits. It must have some skills or resources that are specially helpful to its businesses. It must help its businesses address opportunities to improve their performance that they would fail to realize by themselves. Different opportunities can be realized only by applying different parenting skills or characteristics.
• The essence of successful parenting is therefore to create a fit between the way the parent operates – the parent’s characteristics – and significant improvement opportunities that exist in its particular businesses. The parent’s skills are not good or bas in any absolute sense; their value depends on the nature and needs of their businesses.
• The Strategic Planning Style• Strategic Planning style parents are closely involved with their
businesses in the formulation of plans and decisions. They typically provide a clear overall sense of direction, within which their businesses develop their strategies and take the lead on selected corporate development initiatives.
• The Strategic Control Style• Strategic Control style parents basically decentralize planning to
the businesses but retain a role in checking and assessing what is proposed by the businesses. Thus, businesses are expected to take responsibility for putting forward strategies, plans, and proposals in a “bottom-up” fashion, but the parent may sponsor certain themes, initiatives, or objectives, and will only sanction proposals that meet an appropriate balance of strategic and financial criteria.
• The Financial Control Style• Financial Control style parents are strongly committed to
decentralization of planning. They structure their businesses as stand-alone units with as much autonomy as possible, and with full responsibility for formulating their own strategies and plans.
• Do the parenting opportunities in the business fit with value creation insights in the prospective parenting advantage statement: Will the parent likely to create a substantial amount of value?
• Do the critical success factors in the business have any obvious misfits with the prospective parenting characteristics: Will the parent be likely to influence the businesses in ways that will destroy value?
• Disadvantages of vertical integration– Cost disadvantages of internal supply purchasing.– Remaining tied to obsolescent technology.– Aligning input and output capacities with uncertainty in
market demand is difficult for integrated companies.
• Firms can implement their diversification strategies through internal development, acquisitions, mergers, joint ventures, alliances, or contracting with external partners.
• None of these, however, guaranties easy expansion. Choosing among the various modes involves unavoidable trade-offs.
• Some would argue, for example, that acquiring a company to gain access to the resources needed to compete in an industry is likely to dissipate future profits. Others would cite the difficulties working across organizational boundaries in joint ventures. On the other hand, internal development can be maddeningly slow and rife with uncertainty.
• In short, each mode of expansion has its own benefits and costs. Thus, a firm must carefully weigh each alternative against its needs and the exigencies of a particular competitive situation.
• Cording, Margaret, Petra Christmann, and L. J. Bourgeois III (2002), “A Focus on Resources in M&A Success: A Literature Review and Research Agenda to Resolve Two Paradoxes,” Academy of Management Meeting, August 12, 2002.
• Walter, Gordon A. and Jay B. Barney (1990), “Management Objectives in Mergers and Acquisitions,” Strategic Management Journal, 11(1), 79-86.
• Brouthers, Keith D. (2002), “Institutional, Cultural and Transaction Cost Influences on Entry Mode Choice and Performance,” Journal of International Business Studies, 33(2), 203-211.
• O’Shaughnessy, K. C. and David J. Flanagan (1998), “Determinants of Layoff Announcements Following M&As: An Empirical Investigation,” Strategic Management Journal, 19(10), 989-999.